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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the quarterly period ended June 30, 2000 (Second quarter of
fiscal 2000)
OR
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT For the
transition period from _____________ to _____________
Commission File No. 0-24073
IBS INTERACTIVE, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
DELAWARE 13-3817344
(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
Incorporation or Organization)
2 RIDGEDALE AVENUE
SUITE 350
CEDAR KNOLLS, NJ 07927
(Address of Principal Executive Offices)
(973) 285-2600
(Issuer's Telephone Number, Including Area Code)
_____________________________________________________________
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes |X| No |_|
As of August 10, 2000, 6,753,895 shares of the issuer's common
stock, par value $.01 per share, were outstanding.
Transitional Small Business Disclosure Format (check one):
Yes |_| No |X|
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IBS INTERACTIVE, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of June 30, 2000
(unaudited).......................................................... 1
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2000 and 1999 (unaudited).................. 3
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 (unaudited)...................... 4
Notes to Condensed Consolidated Financial Statements................. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................ 8
PART II. OTHER INFORMATION
ITEM 1. CHANGES IN SECURITIES AND USE OF PROCEEDS......................... 15
ITEM 2. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............... 16
ITEM 3. EXHIBITS AND REPORTS ON FORM 8-K.................................. 17
SIGNATURES................................................................ 18
PART 1
FINANCIAL INFORMATION
TEM 1. FINANCIAL STATEMENTS.
IBS INTERACTIVE, INC.
Condensed Consolidated Balance Sheet
(unaudited, in thousands)
ASSETS JUNE 30, 2000
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Current Assets
Cash and cash equivalents............................... $ 3,390
Accounts receivable (net of allowance for doubtful
accounts of $660).................................... 6,497
Prepaid expenses........................................ 374
Income Tax Receivable................................... 163
Assets Held for Sale.................................... 2,000
----------
Total Current Assets......................... 12,424
----------
Property and equipment, net.................................... 1,929
Intangible assets, net......................................... 15,615
Other assets................................................... 274
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TOTAL ASSETS................................ $ 30,242
===========
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IBS INTERACTIVE, INC.
Condensed Consolidated Balance Sheet
(unaudited, in thousands, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY JUNE 30, 2000
-------------
Current Liabilities
Long-term debt and capital lease obligations, current portion............. $ 2,558
Accounts payable and accrued expenses..................................... 2,439
Accrued Liabilities on Sale of Discontinued Operations ................... 1,359
Deferred revenue.......................................................... 257
-----------
Total Current Liabilities........................................... 6,613
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Long-term debt and capital lease obligations.................................... 982
Deferred compensation........................................................... 590
Accrued Liabilities on Sale of Discontinued Operations.......................... 599
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Total Liabilities.......................................................... 8,784
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Stockholders' Equity
Preferred Stock, $.01 par value, authorized 1,000,000 shares, none issued
and outstanding........................................................ --
Common Stock, $.01 par value, authorized 11,000,000 shares,
6,753,895 shares issued and outstanding................................ 66
Additional paid in capital................................................. 38,866
Accumulated deficit........................................................ (17,474)
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Total Stockholders' Equity................................................. 21,458
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY...................................... $ 30,242
============
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IBS INTERACTIVE, INC.
Condensed Consolidated
Statements of Operations For the
three and six months ended June 30, 2000 and 1999
(unaudited, in thousands, except share and per share amounts)
For the six months ended June 30, For the three months ended June 30,
2000 1999 2000 1999
------------ ----------- ----------- -----------
Revenues ........................................... 11,197 $ 7,616 $ 6,713 $ 4,027
Cost of services ................................... 7,702 4,491 4,464 2,573
----------- ----------- ----------- -----------
Gross profit ....................................... 3,495 3,125 2,249 1,454
Operating expenses:
Selling, general and administrative ........... 6,771 3,630 3,719 2,114
Amortization of intangible assets ............. 1,390 224 1,011 144
Compensation expense - non-cash ............... 237 188 0 105
Severance and restructuring ................... 865 0 0 0
Merger expenses ............................... 0 137 0 109
----------- ----------- ----------- -----------
Operating loss ..................................... (5,768) (1,054) (2,481) (1,018)
Interest expense (income), net ..................... 51 (67) 52 (24)
----------- ----------- ----------- ------------
Income Loss from continuing operations before
income taxes ....................................... (5,819) (987) (2,533) (994)
Tax Benefit (provision) ............................ (11) 77 (6) (45)
Income Loss from continuing operations ............. (5,830) (910) (2,539) (1,039)
Loss from discontinued operations .................. (798) (512) (242) (275)
Loss on disposal of discontinued operations ........ (3,383) 0 (3,383) 0
Net income (loss) .................................. $ (10,011) $ (1,422) $ (6,164) $ (1,314)
=========== =========== =========== ===========
Earnings (loss) per share from continuing operations
Basic and Diluted .................................. $ (0.97) $ (0.22) $ (0.39) $ (0.25)
=========== =========== =========== ===========
Earnings (loss) per share from discontinued
operations Basic and Diluted ....................... $ (0.70) $ (0.12) $ (0.55) $ (0.06)
=========== =========== =========== ===========
Earnings (loss) per share from operations
Basic and Diluted .................................. $ (1.67) $ (0.34) $ (0.94) $ (0.31)
=========== =========== =========== ===========
Weighted average common shares outstanding
Basic .............................................. 5,982,474 4,144,507 6,580,749 4,195,532
Diluted ............................................ 5,982,474 4,144,507 6,580,749 4,195,532
See Accompanying Notes to Condensed Consolidated Financial Statements.
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IBS INTERACTIVE, INC.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2000 and 1999
(unaudited, in thousands)
Six months ended June 30,
2000 1999
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Cash Flows used in Operating Activities..................... $ (5,439) $ (2,297)
Cash Flows used in Investing Activities..................... (70) (1,573)
Cash Flows provided by Financing Activities................. 6,007 490
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NET INCREASE (DECREASE) IN CASH
and CASH EQUIVELENTS....................................... 498 (3,380)
CASH and CASH EQUIVALENTS
AT BEGINNING OF PERIOD...................................... 2,892 5,532
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CASH and CASH EQUIVALENTS
AT END OF PERIOD............................................ $3,390 $2,152
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See Accompanying Notes to Condensed Consolidated Financial Statements.
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NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. FINANCIAL STATEMENT PRESENTATION
a. The condensed consolidated interim financial statements of IBS
Interactive, Inc. ("IBS," the "Company," "we," or "us") included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission with respect to Form
10-QSB. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures made herein are
adequate to make the information contained herein not misleading. These
condensed consolidated interim financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1999 and the notes thereto included in the Company's Annual Report
on Form 10-KSB and the Company's reports on Form 8-K dated March 24, 2000 and
8-K/A dated May 16, 2000. In the Company's opinion, all adjustments (consisting
only of normal recurring adjustments and severance/restructuring charges)
necessary for a fair presentation of the information shown herein have been
included.
The results of operations and cash flows for the six months ended June 30,
2000 presented herein are not necessarily indicative of the results of
operations and cash flows expected for the year ending December 31, 2000.
2. DISCONTINUED OPERATIONS
On June 15, 2000, the Company entered into a agreement to divest its
consumer dial up business subject to certain contingencies. The contingencies
were subsequently resolved and the transaction was announced on August 8, 2000.
Under the terms of the agreement with Earthlink, Inc. ("Earthlink"), the Company
will receive a portion of the purchase price, $2 million, in the third quarter
upon delivery of the customer list to Earthlink. The final purchase price will
be based on the number of subscribers who remain with Earthlink for a specified
minimum period. A loss on disposal of $3.4 million has been recorded in the
second quarter, related primarily to the write off of goodwill, certain
equipment leases and severance costs related to the discontinuance of this
business. The determination of the actual purchase price and the loss on
disposal is expected to be finalized in the fourth quarter of this year. As
required, the Company has restated prior periods' results to reflect the
consumer dial up business as a discontinued operation.
3. BUSINESS COMBINATIONS
PURCHASE ACQUISITIONS
On March 1, 2000 the Company signed an agreement to purchase the
outstanding stock of digital fusion, inc. ("digital fusion") in return for
975,000 shares of unregistered common stock (50,000 shares of which will be
reserved pending settlement of certain matters), a $500,000 three-year
subordinated note accruing 6% interest per annum and the assumption of debt
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totaling approximately $4.2 million. digital fusion is a Tampa, Florida-based
provider of e-Business professional services. Of the assumed $4.2 million of
debt, at June 30,2000, $1.075 million had been paid down and $2.4 million bears
an interest rate of prime rate plus 2% and is secured by substantially all of
the assets of the Company. At present, management expects this $2.4 million
amount will be paid down in full in the third quarter of 2000 with the final
payment due on September 30, 2000.
The following summarized, unaudited pro forma information for the year
ended December 31,1999 and the six months ended June 30, 2000, assumes that the
acquisition of digital fusion had occurred on January 1, 1999. The 1999 proforma
information also assumes that the sale of the consumer dial up business occurred
on January 1, 1999.
DECEMBER 31, 1999 JUNE 30, 2000
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Net Revenues....................... $27,638,000 $12,867,000
Operating loss..................... (7,633,000) (6,141,000)
Loss from continuing operations.... (8,295,000) (6,297,000)
Loss per share:
Basic and Diluted............. $ (1.57) $ (1.05)
The pro forma operating results reflect estimated pro forma adjustments for
the amortization of intangibles arising from the acquisition ($3,167,000 in 1999
and $281,000 in 2000, reduced interest expense from the conversion of digital
fusion debt prior to closing ($203,000 in 1999 and $60,000 in 2000) and the pro
forma operating results of a digital fusion acquisition in April 1999. Pro forma
results of operations information is not necessarily indicative of the results
of operations that would have occurred had the acquisition of digital fusion and
the sale of the consumer dial up business been consummated at the beginning of
1999 or 2000 or of future results of the combined operations.
The value ascribed to the consideration of stock, equity instruments, debt
and related costs ($19.2 million) less the fair market value of net assets
acquired ($3.1 million) resulted in goodwill of $16.1 million. Goodwill will be
amortized over a life of 5 years.
Due to the recent closing of the digital fusion acquisition, the Company
utilized preliminary estimates and assumptions in determining the allocation of
purchase price to assets acquired and liabilities assumed. While management
believes such estimates and assumptions are reasonable, the final allocation of
the purchase price may differ from that reflected in the unaudited June 30, 2000
consolidated balance sheet after a more extensive review of fair values of the
assets and liabilities is completed. As noted earlier the Company has reserved
50,000 shares of common stock for possible issuance pending the resolution of
certain matters.
3. SEVERANCE AND RESTRUCTURING EXPENSES
During the three months ended March 31, 2000, the Company enacted a
reduction in force and, as a result, recognized a charge of $567,000 related to
severance, benefits and entitlements. In addition, the Company decided to
terminate its Microsoft training business and recognized a charge of $298,000
which is comprised of the exit costs of this business and impairment losses on
the value of related assets. As of June 30, 2000, $360,000 remained of the total
accrual of $865,000.
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4. INCOME TAXES.
The Company has not recognized an income tax benefit for its operating loss
generated in the three-month period ended June 30, 2000 based on uncertainties
concerning its ability to generate sufficient taxable income in future periods.
The tax provision for the three month period ended June 30, 2000 is comprised of
a valuation allowance established against deferred tax assets arising from
operating losses and other temporary differences, the realization of which could
not be considered more likely than not. In future periods, tax benefits and
related deferred tax assets will be recognized when management considers
realization of such amounts to be more likely than not. At June 30, 2000 income
tax receivables is comprised of principally tax loss carrybacks, the realization
of which, at present, is considered to be more likely than not.
5. STOCKHOLDERS' EQUITY
In March and April 2000, the Company raised approximately $7.4 million in
net proceeds in a private placement consisting of 68.45 $110,000 units (the
"2000 Private Placement"). Through March 31, 2000, we had received $2,068,000 in
net proceeds from the 2000 Private Placement. In April 2000, we received
additional net proceeds of $5,329,000 before terminating the 2000 Private
Placement. In connection with the 2000 Private Placement we issued 684,500
shares of our common stock at a price of $11 per share and three year redeemable
warrants to purchase 171,125 shares of our common stock at an exercise price of
$13.75 per share. In addition, on May 11, 2000 we issued a three-year warrant to
purchase 11,945 shares of our common stock at an exercise price of $13.75 per
share to LaSalle St. Securities, LLC in consideration for their services as
placement agent for the 2000 Private Placement.
In the second quarter, we issued an option to TeKBanC.com Limited
("TeKBanC.com") to purchase an additional 45.45 units consisting of 454,545
shares of our common stock at a price of $11.00 per share and three-year
warrants to purchase 113,636 shares of common stock at an exercise price of
$13.75. TeKBanC.com's right to purchase these unexercised shares and warrants
expired on August 1, 2000.
On June 15, 2000, we entered into a consulting agreement with TeKBanC in
which we agreed to issue TeKBanC warrants to purchase 70,000 shares of our
common stock at an exercise price of $7.00 in exchange for mergers and
acquisitions, marketing, business development and financial advisory services.
These warrants vest ratably over a six month period ending December 15, 2000 and
vest immediately in the event of a change of control.
In addition, during the three-month period ended June 30, 2000, the Company
granted 340,000 options to employees pursuant to its 2000 Option Plan. Certain
digital fusion officers and employees have been granted non-qualified options to
purchase 480,000 shares of Company common stock; 25% of such options vested
immediately, and as such, have been treated as consideration in determining the
purchase price of digital fusion and the remaining options will vest over a
period of 3 years of continued employment. These options vest immediately upon
change of control and have an exercise price of $10.49 per share.
The Company issued 22,592 shares of reserved common stock in the quarter
ended June 30, 2000 in connection with the realization of contingencies in 1999
acquisitions.
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In March 2000, the Company consummated the acquisition of digital fusion
and in connection therewith issued up to 975,000 shares of its common stock
(50,000 shares of which will be reserved pending settlement of certain matters).
In the first quarter of 2000, the Company approved the release of unearned
shares of common stock related to the 1998 acquisition of Entelechy, Inc.
("Entelechy"). Under terms of the original agreement, such reserved shares were
to be earned ratably over a three year period ending January 31, 2001. Since the
condition of continued employment for the release of such shares has been
waived, the Company recognized a non-cash compensation charge of $214,000 in the
quarter ended March 31, 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). In addition, from time to time, we or our representatives have made or
may make other forward-looking statements orally or in writing. Such statements
may include, without being limited to, statements concerning anticipated
financial performance, future revenues or earnings, business prospectus,
projected ventures, new products, anticipated market performance and similar
matters. The words "plan," "budget, "intend," "anticipate," "project,"
"estimate," "expect," "may," "might," "believe," "potential," "could," "should,"
"would" and similar statements are intended to be among the statements that are
forward-looking statements. The Private Securities Litigation Reform Act of 1995
provides a safe harbor for forward-looking statements. In order to comply with
the terms of the safe harbor, we caution our readers that, because such
statements reflect the reality of risk and uncertainty that is inherent in doing
business, actual results may differ materially from those expressed or implied
by such forward-looking statements. These risks and uncertainties, many of which
are beyond our control, include, but are not limited to, those set forth in the
Company's Form 10-KSB for 1999. Readers are cautioned not to place undue
reliance on these forward-looking statements, which are made as of the date of
this prospectus. Except as otherwise required to be disclosed in periodic
reports required to be filed by companies registered under the Exchange Act by
the rules of the SEC, the Company has no duty and undertakes no obligation to
update such statements.
OVERVIEW
We provide a broad range of e-Business and information technology ("IT")
professional services, including computer networking, programming and
applications development and consulting services, Web-site hosting services and
Internet access services. Our revenues are derived principally from fees earned
in connection with the performance of professional services and Web-Site hosting
services and fees from Internet access services customers.
We commenced operations in June 1995 as an Internet Service Provider
("ISP") offering Web-site hosting services. Since April 1996, we have acquired:
Mordor International; Entelechy, Inc.; JDT WebwerX LLC; DesignFX Interactive,
LLC; Halo Network Management, LLC;
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Spectrum Information Systems, Inc.; Millennium Computer Applications, Inc.;
Realshare, Inc.; Spencer Analysis, Inc.; and digital fusion, inc. We began
to provide e-Business and IT professional services in April 1996 and have
increasingly emphasized such services.
On June 15, 2000, we entered into an agreement to divest our consumer
dial up business subject to certain contingencies. The contingencies
were subsequently resolved and the transaction was announced on August 8,
2000. At June 30, 2000, our consumer dial up business had over 16,000
dial-up subscribers. Total assets, revenues, and operating losses of our
consumer dial up business which has been reflected as discontinued operations
as of and for the six months ended June 30, 1999 and 2000 are as follows:
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SIX MONTHS ENDED JUNE 30,
1999 2000
----- ----
Total Assets.................... $3,769,000 $4,112,000
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Revenues........................ $1,137,000 $1,788,000
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Operating Losses................ ($512,000) ($798,000)
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We also acquired 10 consumer dial up businesses from April 1996 through
July 30, 1999. These businesses were sold in August of 2000 and have been
classified as discontinued operations for financial reporting purposes.
Accordingly, prior periods' results and balance sheet referred to in
Management's Discussion and Analysis are restated.
2000 ACQUISITIONS
PURCHASES
On March 1, 2000, we entered into an agreement to purchase the outstanding
stock of digital fusion, inc. ("digital fusion"), in exchange for 975,000 shares
(50,000 shares of which will be reserved pending settlement of certain matters),
a $500,000 three-year subordinated note accruing 6% interest per annum and the
assumption of debt totaling approximately $4.2 million. digital fusion is a
Tampa, Florida-based provider of e-Business professional services. Of the
assumed $4.2 million of debt, at June 30, 2000, $1.075 million has been paid
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down and $2.4 million bears interest of the prime rate plus 2% and is secured by
substantially all of the assets of the Company. At present, management expects
this $2.4 million amount will be paid down in full in the third quarter of 2000
with the final payment due on September 30, 2000.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased by $2,686,000, or 67%, from $4,027,000 for the
three months ended June 30, 1999 ("1999"), to $6,713,000 for the three months
ended June 30, 2000 ("2000"). The increase in revenues was primarily due to the
additional Internet programming and consulting services revenue of $2,135,000
generated by digital fusion during 2000. Revenues from our largest customer also
increased by $419,000, or 48%, from $867,000 in 1999 to $1,286,000 in 2000. Our
largest customer was responsible for 19% of our revenue in 2000.
COST OF SERVICES. Cost of services consists primarily of salaries and
expenses of engineering, programming and technical personnel, expenses relating
to cost of equipment and applications sold to clients and telecommunications and
equipment costs for Web-site hosting, digital subscriber line and dedicated line
services and fees paid to outside consultants engaged for client projects. Cost
of services increased by $1,891,000, or 74%, from $2,573,000 for 1999 to
$4,464,000 for 2000. The increase in cost of services was primarily due to
increased direct payroll costs, increased use of outside consultants, increased
purchases of equipment for resale and for network services. Growth in our direct
payroll expense accounted for $1,501,000, or 79% of the increase in total cost
of services.
GROSS PROFIT. Our gross profit was $1,454,000, or 36% of revenues in 1999
and $2,249,000, or 34%, of revenues in 2000. The decrease in gross profit as a
percentage of sales was primarily due to a decrease in the profitability of our
network services projects and consulting, offset by an increase in the
profitability of our e-solutions projects and consulting.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries and costs associated with marketing
literature, advertising, direct mailings, and accounting, finance and sales and
marketing personnel, administrative personnel, as well as professional fees and
other costs connected with the administration of the Company. Selling, general
and administrative expenses increased by $1,605,000, or 76%, from $2,114,000 in
1999 to $3,719,000 for 2000. Such increase was primarily due to payroll
increases due to the Company's additional marketing and sales personnel and
administrative personnel resulting from acquisitions and increased hiring,
increases in overall employee benefit expenses as well as increased rent,
telephone and utilities costs associated with the Company's growth and
acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased by $867,000, from $144,000 for 1999 to $1,011,000 for 2000. This
increase is primarily due to the amortization of intangible assets (customer
lists and goodwill) related to the acquisition of Entelechy, Inc. ("Entelechy")
and other acquisitions made throughout 1999 and four months of amortization
related to intangible assets arising from the acquisition of digital fusion.
NON-CASH COMPENSATION EXPENSE. Non-cash compensation expense decreased from
$105,000 in 1999 to $0 in 2000. This decrease is due to the release of shares of
common stock related to the 1998 acquisition of Entelechy. Under terms of the
original agreement, such reserved shares were to be earned
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ratably over a three year period ending January 31, 2001. Since the condition of
continued employment for the release of such shares has been waived, the Company
recognized a non-cash compensation charge of $214,000 in the quarter ended March
31, 2000.
MERGER RELATED EXPENSES. During 2000 we did not incur any merger related
expenses. During 1999 we incurred charges of $109,000 for fees and costs
associated with the acquisitions of Spectrum and Spencer. Such 1999 amounts,
for transactions accounted for as a pooling of interests, are expensed as
services are rendered and costs are incurred.
INTEREST EXPENSE. Interest expense in 2000 consists of interest payments
and accruals on indebtedness in connection with our acquisition of digital
fusion, and to a lesser extent interest payments and accruals on capital leases.
Interest expense was $4,000 and $126,000, respectively, for 1999 and 2000.
INTEREST INCOME. Interest income increased from $28,000 in 1999 to $74,000
in 2000 due to a increase in our cash position in 2000 relative to 1999 as a
result of the timing of our private placement financings in 1999 and 2000.
INCOME TAXES. Income taxes decreased from a provision of $45,000 in 1999 to
$6,000 in 2000. This was due principally to a valuation allowance
established against deferred tax assets arising from net operating losses
and other temporary differences.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the Company
had a net loss of $2,539,000 for the three-month period ended June 30, 2000
compared to a net loss of $1,039,000 for the three-month period ended June 30,
1999.
LOSS FROM DISCONTINUED OPERATIONS. The Company had a net loss of $242,000
related to the consumer dial-up business for the three-month period ended June
30, 2000 compared to a net loss of $275,000 for the three-month period ended
June 30, 1999.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. On June 15, 2000, the Company
entered into an agreement to divest its consumer dial up business subject to
certain contingencies. The contingencies were subsequently resolved and the
transaction was announced on August 8, 2000. Under the terms of the agreement
with Earthlink, Inc. ("Earthlink"), the Company will receive a portion of the
purchase price, $2 million, in the third quarter upon delivery of the customer
list to Earthlink. The final purchase price will be based on the number of
subscribers who remain with Earthlink for a specified minimum period. A loss on
disposal of $3.4 million has been recorded in the second quarter, related
primarily to the write off of goodwill, certain equipment leases and severance
costs related to the discontinuance of this business. The determination of the
actual purchase price and the loss on disposal is expected to be finalized in
the fourth quarter of this year.
NET LOSS. As a result of the foregoing, we recognized a net loss of
$6,164,000 for the three-month period ended June 30, 2000 compared to a net loss
of $1,314,000 for the three-month period ended June 30, 1999.
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SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
REVENUES. Revenues increased by $3,581,000, or 47%, from $7,616,000 for the
six months ended June 30, 1999 ("1999"), to $11,197,000 for the six months ended
June 30, 2000 ("2000"). The increase in revenues was primarily due to the
additional Internet programming and consulting services revenue of $3,025,000
generated by digital fusion during 2000. Revenues from our largest customer also
increased by $380,000, or 21%, from $1,782,000 in 1999 to $2,162,000 in 2000.
Our largest customer was responsible for 19% of our revenue from continuing
operations in 2000.
COST OF SERVICES. Cost of services for consists primarily of salaries and
expenses of engineering, programming and technical personnel, expenses relating
to cost of equipment and applications sold to clients and telecommunications and
equipment costs for Web-site hosting, digital subscriber line and dedicated line
services and fees paid to outside consultants engaged for client projects. Cost
of services increased by $3,211,000, or 71%, from $4,491,000 for 1999 to
$7,702,000 for 2000. The increase in cost of services was primarily due to
increased direct payroll costs and increased purchases of equipment for resale.
Growth in our direct payroll expense accounted for $2,487,000, or 77%, of the
increase in total cost of services.
GROSS PROFIT. Our gross profit was $3,125,000, or 41%, of revenues in 1999
and $3,495,000, or 31%, of revenues in 2000. The decrease in gross profit as a
percentage of sales was primarily due to a decrease in the profitability of our
network services projects and consulting.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses consist primarily of salaries and costs associated with marketing
literature, advertising, direct mailings, and accounting, finance and sales and
marketing personnel, administrative personnel, as well as professional fees and
other costs connected with the administration of the Company. Selling, general
and administrative expenses increased by $3,141,000, or 87%, from $3,630,000 in
1999 to $6,771,000 for 2000. Such increase was primarily due to payroll
increases due to the Company's additional marketing and sales personnel and
administrative personnel resulting from acquisitions and increased hiring,
increases in overall employee benefit expenses as well as increased rent,
telephone and utilities costs associated with the Company's growth and
acquisitions.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
increased by $1,166,000, from $224,000 for 1999 to $1,390,000 for 2000. This
increase is primarily due to the amortization of intangible assets (customer
lists and goodwill) related to the acquisition of Entelechy and others made
and four months of amortization related to intangible assets arising from
the acquisition of digital fusion during 2000.
SEVERANCE AND RESTRUCTURING. During the first quarter of 2000, the Company
enacted a reduction in force and, as a result, recognized a charge of $567,000
related to severance, benefits and entitlements. In addition, the Company
decided to terminate its Microsoft training business and recognized a charge of
$298,000 which is comprised of the exit costs of this business. During 1999 we
did not incur any such charges.
INTEREST EXPENSE. Interest expense in 2000 consists of interest payments
and accruals on indebtedness in connection with our acquisition of digital
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fusion, and to a lesser extent interest payments and accruals on capital leases.
Interest expense was $8,000 and $154,000, respectively, for 1999 and 2000.
INTEREST INCOME. Interest income increased from $75,000 in 1999 to $103,000
in 2000 due to a increase in our cash position in 2000 relative to 1999 as a
result of the timing of our private placement financings.
INCOME TAXES. The Company recorded a tax provision of $11,000 in the
six-month period ended June 30, 2000 compared to a tax benefit of $77,000 in the
six-month period ended June 30, 1999.
LOSS FROM CONTINUING OPERATIONS. As a result of the foregoing, the Company
had a net loss of $5,830,000 for the six-month period ended June 30, 2000
compared to a net loss of $910,000 for the six-month period ended June 30, 1999.
LOSS FROM DISCONTINUED OPERATIONS. The Company had a net loss of $798,000
for the six-month period ended June 30, 2000 compared to a net loss of $512,000
for the six-month period ended June 30, 1999.
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS. On June 15, 2000, the Company
entered into an agreement to divest its consumer dial up business subject to
certain contingencies. The contingencies were subsequently resolved and the
transaction was announced on August 8, 2000. Under the terms of the agreement
with Earthlink, Inc. ("Earthlink"), the Company will receive a portion of the
purchase price, $2 million, in the third quarter upon delivery of the customer
list to Earthlink. The final purchase price will be based on the number of
subscribers who remain with Earthlink for a specified minimum period. A loss on
disposal of $3.4 million has been recorded in the second quarter, related
primarily to the write off of goodwill, certain equipment leases and severance
costs related to the discontinuance of this business. The determination of the
actual purchase price and the loss on disposal is expected to be finalized in
the fourth quarter of this year.
NET LOSS. As a result of the foregoing, the Company had a net loss of
$10,011,000 for the six-month period ended June 30, 2000 compared to a net loss
of $1,422,000 for the six-month period ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
In February 2000, we commenced a $9.9 million private placement consisting
of units of common stock and warrants (the "2000 Private Placement"). The
expected use of proceeds for amounts raised in the 2000 Private Placement is
repayment of bank debt, expansion of sales and marketing efforts, and for
working capital and general corporate purposes. Each unit of the 2000 Private
Placement (the "Units") was offered at a price of $110,000 and consisted of
10,000 shares of common stock and three-year warrants to purchase 2,500 shares
of common stock at a price of $13.75 per share. Through March 31, 2000, we had
received $2,068,000 in net proceeds from the 2000 Private Placement.
In April 2000, we received additional net proceeds of $5,329,000 before
terminating the 2000 Private Placement. Of this amount, TeKBanC.com Limited
("TeKBanC.com") purchased $5 million in 45.45 of the Units. Ahmed Al-Khaled,
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Chief Operating Officer of TeKBanC.com, joined our Board of Directors in April
2000 and, in that capacity, received three-year warrants to purchase 60,000
shares of common stock at $13.75 per share. Mr. Al-Khaled was named to the
Executive Committee of the Board of Directors of the Company in April 2000.
TeKBanC.com also had the right to purchase an additional 45.45 units consisting
of 454,545 shares of common stock at a price of $11.00 per share and three-year
warrant to purchase 113,636 shares of common stock at an exercise price of
$13.75 per share. TeKBanC.com's right to exercise this option expired on August
1, 2000.
Net cash used in operating activities increased from $2,297,000 used in
1999 to $5,439,000 used in 2000. This change was primarily attributable to
operating results from continuing and discontinued operations that produced a
net loss in the amount of $10,011,000 for the six months ended June 30, 2000,
compared to a net loss of $1,422,000 for the corresponding six month period in
1999.
Net cash used in investing activities decreased from $1,573,000 in 1999 to
$70,000 in 2000. The decrease is due to increased capital expenditures in 1999
principally related to the expansion and enhancement of the Company's network
and the acquisition of five ISPs (discontinued) during the first two quarters of
1999.
Net cash provided by financing activities was $490,000 in 1999 compared to
$6,007,000 provided in 2000. This change is primarily attributable to the
proceeds raised in the 2000 Private Placement.
At June 30, 2000, we had capital lease obligations in the aggregate amount
of $9,000. These capital lease obligations are secured by the personal
guarantees of Messrs. Loglisci, Frederick and Altieri and, in addition, certain
of these capital lease agreements are secured by the equipment that is the
subject of the capital lease.
In May 1998, we secured equipment lines of credit from three equipment
vendors, each in the amount of $500,000. There were no borrowings outstanding
under these lines of credit at June 30, 2000.
Our working capital at June 30, 2000 was $5,811,000. We believe that
operating cash flow generated through existing customers, new business
activities and cost reduction efforts, current cash and cash equivalents and
working capital levels, and proceeds from the sale of our consumer dial up
business will be sufficient to fund operating cash flow needs, debt principal
payment obligations, and capital expenditures. Our current estimate of capital
expenditures for the year ending December 31, 2000 is $250,000. In the event
that we are unsuccessful in reducing our operating losses for the balance of
2000, we will be required to re-examine our current business plans and seek
alternative financing. No assurances can be given that alternative financing
will be available on terms acceptable to us. At present, management expects that
$2.4 million in bank debt will be paid down in full in the third quarter of 2000
with the final payment due September 30, 2000.
SUBSEQUENT EVENTS
On July 31, 2000, we announced a three-way strategic combination with
Infonautics, Inc. ("Infonautics") and First Avenue Ventures, Inc. ("First Avenue
Ventures") to create a publicly-held company called Digital Fusion, Inc
("Digital Fusion"). Under the terms of the definitive agreement, shareholders of
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the Company and Infonautics will receive one share of Digital Fusion Stock for
each share of the Company's or Infonautics common stock that they own. First
Avenue Ventures will invest $6 million in the new company and its shareholders
will receive shares of Digital Fusion convertible preferred stock or common
stock, which will represent, in the aggregate, approximately 4.5% of the
issued and outstanding shares of the new company.
PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
I. As part of our acquisition of Entelechy, Inc., in January 1998, on
February 29, 2000 we issued 84,808 shares of common STOCK to the former
shareholders of Entelechy, Inc. who are also employees of the Company. Because
this issuance did not involve any public offering, we claimed exemption from
registration under the Securities Act of 1933, as amended (the "Act") pursuant
to Section 4(2) of the Act.
II. On January 12, 2000, we entered into a consulting agreement with EBI
Securities, Inc. ("EBI"), in which we agreed to issue EBI warrants to purchase
50,000 shares of common stock at an exercise price of $12.50 per share upon the
closing of certain mergers or acquisitions to be identified. Because this
issuance did not involve any public offering, we claimed exemption from
registration under the Section 4(2) of the Act.
III. In connection with the 2000 Private Placement, during the first and
second quarters of 2000 we issued 684,500 shares of our common stock at a price
of $11 per share and three year redeemable warrants to purchase 171,125 shares
of our common stock at an exercise price of $13.75 per share. In addition, on
May 11, 2000 we issued a three-year warrant to purchase 11,945 shares of our
common stock at an exercise price of $13.75 per share to LaSalle St. Securities,
LLC in consideration for their services as placement agent for the 2000 Private
Placement. Because this issuance did not involve any public offering, we claimed
exemption from registration under the Section 4(2) of the Act.
IV. In connection with our merger with digital fusion, inc., on March 1,
2000 we issued 925,000 shares of common stock in exchange for all of the issued
and outstanding common stock of digital fusion, inc., and may issue an
additional 50,000 shares upon settlement of certain matters, pursuant to the
related Agreement and Plan of Merger. In addition, we issued a $500,000
subordinated note (accruing 6% per annum) to the former shareholders of digital
fusion, inc. Because this issuance did not involve any public offering, we
claimed exemption from registration under the Section 4(2) of the Act.
V. On March 1, 2000 we granted non-qualified options to purchase 480,000
shares of common stock to certain of the former employees of digital fusion,
inc.; 25% of such options vested upon grant and the remaining options will vest
over a period of 3 years of continued employment. All of these options will vest
immediately upon a change of control. Because this issuance did not involve any
public offering, we claimed exemption from registration under the Section 4(2)
of the Act.
VI. As part of our acquisition of the Renaissance Internet Access division
of PIVC, LLC on February 22, 1999, on March 1, 2000 we issued 12,585 shares of
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common stock that had been held in reserve to PIVC, LLC pursuant to the terms of
the related Purchase Agreement. Because this did not involve any public
offering, we claimed exemption from registration under the Section 4(2) of the
Act.
VII. As part of our acquisition of Spectrum Information Systems, Inc. on
March 31, 1999, on March 30, 2000 we issued 10,909 shares of common stock that
had been held in reserve to the former shareholders of Spectrum Information
Systems, Inc., pursuant to the terms of the related Acquisition Agreement.
Because this issuance did not involve any public offering, we claimed exemption
from registration under the Section 4(2) of the Act.
VIII. As part of our acquisition of Millenium Computer Applications, Inc.,
on April 30, 1999, on May 2, 2000 we issued 3,092 shares of common stock that
had been held in reserve to the former shareholders of Millenium Computer
Applications, Inc., pursuant to the terms of the related Acquisition Agreement.
Because this issuance did not involve any public offering, we claimed exemption
from registration under the Section 4(2) of the Act.
IX. As part of our acquisition of Spencer Analysis, Inc., on June 30, 1999,
on May 2, 2000 we issued 19,500 shares of common stock that had been held in
reserve to the former shareholders of Spencer Analysis, Inc., pursuant to the
terms of the related Acquisition Agreement. Because this issuance did not
involve any public offering, we claimed exemption from registration under the
Section 4(2) of the Act.
X. On June 15, 2000, we entered into a consulting agreement with TeKBanC in
which we agreed to issue TeKBanC warrants to purchase 70,000 shares of our
common stock at an exercise price of $7.00 in exchange for mergers and
acquisitions, marketing, business development and financial advisory services.
These warrants vest ratably over a six month period ending December 15, 2000 and
vest immediately in the event of a change of control. Because this issuance did
not involve any public offering, we claimed exemption from registration under
the Section 4(2) of the Act.
XI. On March 28, 2000, we issued an option to TeKBanC.com Limited
("TeKBanC.com") to purchase an additional 45.45 units consisting of 454,545
shares of our common stock at a price of $11.00 per share and three-year
warrants to purchase 113,636 shares of common stock at an exercise price of
$13.75. TeKBanC.com's right to purchase these shares and warrants expired on
August 1, 2000. Because this issuance did not involve any public offering, we
claimed exemption from registration under the Section 4(2) of the Act.
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on June 9, 2000.
Proposals presented for a stockholder vote were (i) the election of eight
directors to serve until the next annual meeting of Stockholders, (ii) the
approval of IBS' 2000 Stock Option Plan and (iii) the ratification of the
election of BDO Seidman, LLP as independent auditors for the Company for fiscal
year 2000.
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Each of the incumbent directors nominated by the Company were elected with
the following voting results:
Votes for Votes Withheld
--------- --------------
Nicholas R. Loglisci, Jr. 4,792,569 33,374
Frank R. Altieri, Jr. 4,792,685 33,258
Roy E. Crippen, III 4,792,685 33,258
Susan Holloway Torricelli 4,792,485 33,458
Barrett N. Wissman 4,792,685 33,258
David Faeder 4,792,685 33,258
Bruce E. Fike 4,792,670 33,758
Ahmed Al-Khaled 4,792,670 33,758
IBS' 2000 Stock option Plan was approved with the following voting results:
Votes Cast For Votes Cast Against Absentions Not Voted
2,721,660 159,426 18,008 1,926,849
The ratification of the appointment of BDO Seidman, LLP as the Company's
independent auditors for the fiscal year 2000 was approved with the following
voting results:
Voted Cast For Votes Cast Against Abstentions
4,800,241 700 25,002
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
The exhibits in the following table have been filed as part of this
Quarterly Report on Form 10-QSB:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
27.1 Financial Data Schedule for the six-month period ended
June 30, 2000.
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(b) Reports on Form 8-K.
On May 16, 2000, the Company filed an amended Current Report on Form 8-K/A,
amending the Current Report on Form 8-K filed March 24, 2000, to include the
financial statements required pursuant to Items 7(a) and (b) with respect to the
Item 2 event reported on such form 8-K.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
IBS INTERACTIVE, INC.
Date: August 14, 2000
By: /s/ Nicholas R. Loglisci, Jr.
--------------------------------------------
Name: Nicholas R. Loglisci, Jr.
Title: President and Chief Operating Officer
(Principal Executive Officer)
Date: August 14, 2000
By: /s/ Howard B. Johnson
--------------------------------------------
Name: Howard B. Johnson
Title: Chief Financial Officer
(Principal Financial and Accounting
Officer)
18
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule for the six-month period ended
June 30, 2000.